Management
2022
DOI: 10.2478/manment-2019-0090
NGUYEN THANH LIEM
TRINH QUOC TRUNG
NGUYEN VINH KHUONG
CAO THI MIEN THUY
Is short term debt
maturity linked to real
earning management?
Nguyen Thanh Liem, Ph.D.,
University of Economics and Law,
Ho Chi Minh City, Vietnam;
and Vietnam National University,
Ho Chi Minh City, Vietnam,
ORCID: 0000-0002-3756-055X.
Trinh Quoc Trung, Ph.D., Assoc. Prof.,
University of Economics and Law,
Ho Chi Minh City, Vietnam;
and Vietnam National University,
Ho Chi Minh City, Vietnam,
ORCID: 0000-0002-7031-4895.
Nguyen Vinh Khuong, Ph.D.,
University of Economics and Law,
Ho Chi Minh City, Vietnam;
and Vietnam National University,
Ho Chi Minh City, Vietnam,
ORCID: 0000-0002-7649-5113.
Cao Thi Mien Thuy, M.Econ.,
University of Economics and Law,
Ho Chi Minh City, Vietnam;
and Vietnam National University,
Ho Chi Minh City, Vietnam,
ORCID: 0000-0001-5452-2451.
.
Vol. 26, No. 1
1. Introduction
The literature on the effect on earnings
management of short term debt maturity
remains rather inconclusive. In addition,
many studies have concentrated on the
debt covenant hypothesis on the basis of
the optimistic accounting principle and
documented that short-term debt maturity
helps firms to curb earnings management
behavior (DeFond & Jiambalvo, 1994; Fields
et al., 2018; Gupta et al., 2008). These studies
primarily utilize the proxy of accruals-based
earnings management (AEM) and focus
only on a linear relationship between short-
term debt maturity and the management of
earnings.
Fields et al. (2018) argue that refinancing
pressure can be conducive to managerial
misconduct as a borrower, especially when
they employ a substantial volume of short-
term debt. Fung and Goodwin (2013) argue
that the theory of financial distress predicts
a positive correlation between debt and
earnings management. Fields et al. (2018)
show that firms with increased short-
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term debt maturity are more likely to engage in accruals-based earnings

management, because the refinancing pressure caused by short-term debt
employment incentivizes firms to manipulate earnings to make them look
more appealing. Thanks to this, refinancing can take place, enabling firms to
continue their operations.
On the other hand, a number of research papers on bank monitoring have
documented either a negative effect (Ahn & Choi, 2009) or mixed results (Fung
& Goodwin, 2013). Short-term debt maturity, according to Fung and Goodwin
(2013), may play a role as a governing mechanism that curbs incentives for
earnings management. Although the results are somewhat inconsistent, firms
are commonly considered to be more likely to manipulate earnings where there
is a higher degree of information asymmetry and a lower level of monitoring
(Ahn & Choi, 2009; Jones et al., 2005).
One clear limitation of previous literature is that, as noted, empirical research
appears to concentrate on accrual-based earnings manipulation (see, for
example, DeFond & Jiambalvo, 1994; Hosseini & Joshaghani, 2019; Tang & Wati,
2021), whereas there are two basic forms of earnings management. Management
of real earnings may be either a substitution or a complement to the accrual-
based variant. Studies on the relationship between debt, especially short-term
debt maturity, and real earnings manipulation are relatively rare, although the
connection may have a clear theoretical context. In addition, by exploring a non-
linear relationship between these two variables, we seek to resolve the mixed
results on the effect of debt on earnings management.
A panel dataset of firms listed in Vietnam for the period 2009-2017 is used
to analyze the effect of short-term debt maturity on earnings management. In
this paper, we primarily focus on firms operating in this market, firstly because
Vietnam is an emerging economy where bank credit still dominates as a major
source of corporate financing. To improve borrowing capacity and have better
access to debt funding, firms could be inclined to participate in earnings
management actions (García-Teruel et al., 2014). Another ex-post motive is
to prevent breaches of the debt covenant (DeFond & Jiambalvo, 1994). Those
motivations appear pressing especially in the case of short-term debt maturity
because firms may face more intense liquidity risk (Diamond, 1991). Furthermore,
inadequate market and weak institutions in Vietnam may exacerbate firms’
access to long-term capital, forcing firms to employ excessive short-term debt
maturity. In this context, short-term debt maturity may be destructive might
lead to undesirable consequences and warrants a thorough study in an emerging
country’s setting.

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The remainder of the existing paper is arranged as follows. A brief review of

the literature on the types of earnings management, the motivation for earnings
management, especially debt-related factors, and real earnings management
is given in section 2. The research approach, outlining the hypotheses, data
handling and techniques for estimation, are discussed in section 3. The findings
are presented in section 4, while section 5 concludes the paper with many
implications for related stakeholders.

2. Literature review

The method of manipulating numbers to confuse financial statement users with

regard to the actual economic performance of firms is earnings management.
Such a behavior is often opportunistic in a sense that it may influence contracting
which depends on the earnings numbers reported on financial statements (Healy
& Wahlen, 1999). To execute earnings management, there are two widely cited
techniques: accruals-based earnings management (AEM) and manipulation of
actual operations (REM). Previous research indicates that the debates on earnings
management revolved mainly around accruals-based earnings management
(Ruiz, 2016).
The connection between short-term debt maturity and earnings
management exists as a result of information asymmetry between banks,
as a party that provides financing, and firms. Banks approve loans based
on firms’ financial statements; therefore, to obtain new loans perhaps one
way for firms is through manipulating earnings in a bid to alter the bottom
line (Gupta & Fields, 2006) (i.e., borrower’s moral hazard problem). After
loans are granted, moral hazard arises in a principal-agent relationship. To
prevent this opportunistic behavior of borrowers, banks conduct monitoring
activities. Both Diamond (2004) and Rey and Stiglitz (1993) praise short-term
debt maturity and explain why short-term debt maturity contracts can give
banks/investors greater monitoring advantage: bad news in the presence of
short-term debt maturity is easier to be revealed and lenders could demand
payment immediately (Diamond, 1991).
Instead, on the other side, the debt covenant hypothesis offers another view
on the effect on earnings management of short-term debt maturity. The reasons
for earnings manipulation in the presence of short-term debt maturity are
because borrowers want to (i) avoid the violation of loan covenants (DeFond
& Jiambalvo, 1994); (ii) delay the acknowledgment of negative news (Gupta et
al., 2008); (iii) obtain a new loan under refinancing pressure (Fields et al., 2018).

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By incorporating non-linear models, Trung et al. (2020) have reconciled the

mixed results between short-term debt maturity and accrual-based earnings
manipulation, arguing that short-term debt maturity decreases (increases)
the probability of earnings management at low (high) levels.
Compared to long-term debt maturity, one unique distinctive characteristic
of short-term debt maturity is that short-term debt maturity holds firms more
accountable and subject to more constant debt holder monitoring, allowing them
to function as an efficient governing mechanism (Trung et al., 2020). Since firms
are in need of engaging in information exchanges with lenders, short-term debt
maturity could effectively discipline borrowing firms if they choose to shirk
(Myers, 1977). Another difference between the two forms of debt is that short-
term debt maturity is more prone to make businesses susceptible to financial
distress (Gupta et al., 2008). This is because the maturity of short-term debt
greatly raises the liquidity risk, compared to the long-term one (Trung et al.,
2020).
In summary, the above discussion highlights possible different impacts
of short-term and long-term debt, along with the inconclusive empirical
evidence on the association between debt and earnings management.
Research should be undertaken to investigate the effect of short-term debt
maturity. Furthermore, prior studies are more into the effect of debt on
earnings management based on accruals (DeFond & Jiambalvo, 1994; Ghosh
& Moon, 2010; Prabowo et al., 2020), leaving the gap of how short-term debt
maturity effects real earnings management under-explored.
Our study provides a many-fold contribution to the literature. First, neither
of these studies examines the non-linear connection between short-term debt
maturity and earnings manipulation. Since short-term debt has different
features compared to long-term one, analyzing just the total debt (DeFond
& Jiambalvo, 1994; Ahn & Choi, 2009; Ghosh & Moon, 2010; Prabowo et al.,
2020) is not adequate. Therefore, we gather and draw on relevant theories
and empirical studies to introduce non-linear models to fill this gap. Second,
our analysis employs real activities manipulation as recommended by
Kim et al. (2011), rather than accruals-based management which has been
extensively explored. Real activities manipulation is preferred to the accrual-
based method because it is simpler to execute and more challenging for
outsiders to uncover (García-Teruel et al., 2014; Kim et al., 2011; Zang, 2012),
thus ignoring the latter technique may lead to a biased conclusion on the
effect of debt on the management of earnings. Finally, our study focuses on

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Vietnam – an emerging market – where the earnings management activity

of a company is highly influenced by firm-bank relationships. There is one
study that analyzes the relationship between debt maturity and real earnings
management, but the research context is the US (see Draief & Chouaya, 2022),
an economy with much different institutional setting and development level
of financial markets.
Vietnam is an interesting setting for the study of the mentioned link since
even listed firms tend to depend heavily on the maturity of short-term debt,
in spite of collective efforts to improve access to long-term financing from the
government and international entities. Vietnam was awarded the rank of 29th out
of 190 territories with respect to credit access for firms, even with the revamped
regulations on collateral requirements and the operations of credit information
sharing (Trung et al., 2020). Therefore, research in this setting can provide more
insights and have crucial implications.

3. Research methodology

3.1. Hypothesis development

Managers conduct earnings management behavior for many purposes, one

of which is to obtain loan contracts with better terms. In general, managers
are motivated to manipulate earnings because banks usually base on the
financial statements to approve the loans. For firms with short-term debt
maturity, the incentive is greater as short debt maturity requires renewals
more often. Nonetheless, this type of debt may preferably play a monitoring
role on the firms (Diamond, 2004; Rey & Stiglitz, 1993), in particular, where
short term debt is still low. We argue that short-term debt maturity has a
commendable impact at a low degree of short-term debt, minimizing
earnings management. Or at least, at low short-term leverage, short-term
debt maturity causes less earnings management compared to high short-term
leverage. Short-term debt maturity, on the contrary, could strongly encourage
borrowers to manage earnings at high short-term debt maturity levels. This is
because it can exacerbate the threats of liquidity risk and bankruptcy (Gupta
et al., 2008).
In summary, our central empirical hypothesis is:
H1: There is a U-shaped relationship between short-term debt and real earnings
management.

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3.2. Data collection

For the years 2009-2017, we filter firms from the Thomson Reuter database
using the following parameters: (1) the firm is listed on the two largest
exchanges of HOSE and HNX in Vietnam, (2) the firms are selected from
nine GICS sectors (excluding Financials sector), (3) only leveraged firms are
included since we intend to investigate the effect of (short-term) debt on the
earnings management behavior. The final sample totals 601 firms and 3,936
firm-year observations. We divide the sample into four equal groups according
to the short-term debt maturity quantiles. STDQ1 means the first quartile,
STDQ2 second quartile, STDQ3 third and STDQ4 the highest fourth quartile,
respectively.
Following Roychowdhury (2006), using estimates of the abnormal production
costs, abnormal discretionary expenses, and an overall index that incorporates
all components, we construct proxies for real earnings management. Following
Fung and Goodwin (2013), as a metric for short-term debt maturity, we use the
ratio of short-term debt to total assets. We presume that the liquidity concerns
arising from the failure to renew debt due in the very near future are due.
Therefore, we describe short term debt maturity as debt maturing in a year or
less, similar to Gupta and Fields (2006).

Table 1. Summary statistics (n=3,936)

STD REM1 REM2 REM3

STD Quartiles
Mean Mean Mean Mean

STDQ1 (Lowest quartile) 0.0077 -0.0370 -0.0114 -0.0484

STDQ2 0.0720 -0.0064 -0.0026 -0.0090

STDQ3 0.1843 0.0124 0.0017 0.0141

STDQ4 (Highest quartile) 0.3799 0.0497 0.0226 0.0722

Source: calculation by the author from analysis data

Statistics on short-term debt maturity and earnings management in each

quartile are listed in table 1. These figures clearly demonstrate that with rising
short-term debt maturity levels, real earnings management increases. This trend
is consistent in both three measurements of real earnings management, namely

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REM1, REM2, and REM3. Interestingly, in first and second quartiles (low-short
term debt maturity level), it appears that real earnings management responds
negatively to short term debt maturity, in favor of the lenders’ monitoring
hypothesis. On the other hand, its positive response at higher quartiles supports
the debt covenant hypothesis. This might imply a non-monotonic relationship.
In the following section, we explore the relation between short-term debt
maturity and earnings management through empirical methods to address this
problem.

3.3 The baseline model

In this article, we use the following model, in line with Gupta and Fields (2006)
and Fung and Goodwin (2013):

EMit = β0 + β1STDQ2it + β2STDQ3it + β3STDQ4it + Controlsit + εit (1)

Where: EM is the dependent variable, earnings management, using three

proxies including firm’s abnormal production costs (REM1), abnormal
discretionary expenses (REM2), and an overall measure that incorporates all
parts of the components respectively (REM3). STD: independent variable,
short term debt, short-term debt / total assets assessed. STDQ1, STDQ2,
STDQ3, and STDQ4 are four quartiles of short term debt maturity, and STDQ1
is omitted to avoid perfect multicollinearity. Control variables are drawn on
the relevant literature and discussed in section 5 (also see Appendix). εit is the
residual of the model.

As for the estimation strategies, we rely on the fixed effects model which
enables the handling of fixed effects, one potential source of endogeneity.
Fixed effects modeling is typically employed when panel datasets are
employed. We also conduct System Generalized Method of Moments to deal
with other sources of endogeneity, such as the two-way correlation between
the dependent variable and independent ones. The latter method serves as a
robustness check to ensure the reliability of our findings. Conventional tests of
the autocorrelation of order 2 and overidentification are conducted to ensure
that the instruments are valid (Roodman, 2009). All the p-values of test results
are higher than 10 percent, satisfying the conditions of no autocorrelation of
order two and overidentification, suggesting that our estimates are reliable for
statistical inferences.

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4. Empirical results

4.1.Regression analysis

The regression results are shown in table 2. REM1, REM2, and REM3 present the
three proxies, including the firm’s abnormal production costs (REM1), abnormal
discretionary expenses (REM2), and the overall measure that incorporates all
parts of the components respectively (REM3).

Table 2. Regressions using fixed effects (n=3,936)

REM1 REM2 REM3

Variables
Model 1 Model 2 Model 3

STDQ2 0.016 0.004 0.019

STDQ3 0.023* 0.008 0.031**

STDQ4 0.029* 0.012* 0.042**

Costofdebt -0.003** 0.001 -0.002**

Effectivetax 0.006** 0.002** 0.009**

Zscore -0.049*** -0.004 -0.053***

Postprofit 0.032** 0.013* 0.046**

Marketshare 0.280** 0.145* 0.426*

ROA -0.412*** -0.059** -0.470***

TA -0.000* -0.000** -0.000**

MTB 0.004 -0.003 0.000

_cons 0.032 -0.006 0.026

Note: *, * *, and * * * at 10 % , 5%, and 1% respectively signify significance. STDQ1 is

omitted because of perfect multicollinearity.

Source: calculation by the author from analysis data

From table 2, the coefficients of the independent variables in higher quartiles

are completely in line with our expectation: both value and significance of
coefficients of STDQ2 to STDQ4 increase with the increasing of quantiles of short-

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term debt maturity. This implies that managers have incentives to manipulate
real activities at high short-term debt levels.
Interestingly, at the second quartile of short term debt maturity, the coefficients
of all three proxy of earnings management are insignificant, suggesting that
managers are unlikely to manipulate real activities in low short term debt
maturity rate. Because managers seem not to be so concerned about liquidity
risk when facing low levels of short term debt maturity. Therefore, debt covenant
violation is a weak motivation for managers’ opportunistic behavior in a low
degree of the short-term maturity of debt. Another potential reason may be that
less information asymmetry is correlated with those borrowing less short-term
debt maturity, so the monitoring of banks plays a minor role in their strategy for
earnings management. Therefore, at low levels of short-term debt, the behavior
of firms is more in line with the monitoring hypothesis of short-term debt
(Myers, 1977).
Besides that, the influence of debt in short-term maturity on earnings
management is documented with all the three proxies of real activities
manipulation include REM1, REM2, and REM3. Also, the effect is larger when
using REM1 to proxy for real earnings management than REM2. This indicates
that managers are more likely to temporarily raise revenue, lower costs of
products sold, and ultimately cut discretionary spending to achieve short-run
earnings goals in the presence of high levels of short-term debt. The result is
consistent with financial distress hypothesis at high levels of short-term debt
(Fung and Goodwin, 2013).
To summarize, the results are not completely in line with hypothesis H1
which points to a U-shaped relationship between short-term debt and earnings
management, since the coefficient of STQ2 is not significantly negative.
However, the results show supporting evidence that firms tend to refrain from
engaging in real earnings management at low levels, and only increase earnings
management at higher levels of short-term debt maturity, leading to a nonlinear
relationship between short-term debt and real earnings manipulation. This
serves as an indicator that firms can weigh up the costs and benefits associated
with real earnings management. The result is also consistent with Draief
& Chouaya (2022), which documents a positive relationship between real
earnings manipulation and short-term debt maturity for U.S firms.
One concern is whether the outcomes are driven by any other factors is not certain.
We reply to this concern by including some control variables in our model as follows:
First, after Ghosh and Moon (2010), we add Costofdebt to find a significant
association at low and high debt levels between interest expense and earnings

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quality. We also use the Z-score to track the risk of bankruptcy that could occur
in the presence of short-term debt maturity (Diamond, 2004).
Secondly, since businesses with greater market shares participate in higher
levels of exploitation of actual activities, we use Marketshare (Zang, 2012).
Effectivetax is also included because tax expenditure, creating an incentive to
reach benefit goals (Cook et al., 2008; Dhaliwal et al., 2004).
Finally, we also have some control variables in our regression that are
significantly linked to earnings management, such as Postprofit, ROA, TA and
MTB. Because firms with a strong financial health are unlikely to manage
earnings upwards (Gupta & Fields, 2006; Gupta et al., 2008). The effects of
these control variables are in line with previous research findings and our
expectations. Costofdebt, Z-Score, Postprofit, ROA, and TA coefficient figures
are all negative and important, indicating that real earnings management for
firms with more financial difficulty is higher. On the contrary, the coefficient
estimates of Effectivetax and Marketshare are positive and important, suggesting
that firms with advantages in the industry have more flexibility for real activities
manipulation.

4.2. Robustness test

It is possible that there might be an endogeneity issue arising from the

reciprocal relationship between the dependent variable and short term debt
maturity variable (Gupta et al., 2008) as well as other explanatory variables. To
address this issue, we apply the two-step system GMM (Roodman, 2009). All
the p-values of test results are higher than 10 percent (not reported in table 4
for sake of brevity), satisfying the conditions of no autocorrelation of order two
and overidentification, suggesting that our estimates are reliable for statistical
inferences. Table 3 indicates that findings are largely consistent with previous
results in table 2, i.e., businesses are more likely to exploit real earnings at high
short-term debt maturity levels.

Table 3. Regressions using SGMM (n=3,936)

REM1 REM2 REM3

Variables
Model 1 Model 2 Model 3

STDQ2 0.051** -0.013 0.081**

STDQ3 0.054** -0.011 0.086**

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STDQ4 0.091** 0.009 0.148***

Costofdebt -0.017** -0.002 -0.018

Effectivetax 0.048* -0.020* 0.054*

Zscore -0.048** -0.010 -0.066**

Postprofit 0.064 0.034* 0.140**

Marketshare -0.019 -0.328 -0.442

ROA -0.114 -0.020 -0.205

TA -0.000 0.000 0.000

MTB -0.025** -0.016** -0.033**

_cons -0.030 0.012 -0.095

Note: *, * *, and * * * at 10 % , 5%, and 1% respectively signify significance. STD2Q1 is

omitted because of high multi-collinearity.

Source: calculation by the author from analysis data

5. Conclusions

This paper explores the effect on real earnings management of short-term

debt maturity for non-financial listed companies in Vietnam from 2009-2017.
By exploring the non-linearity relationship between short-term debt maturity
and real earnings management, our research expands the literature. Firstly, our
findings show that managers are unlikely to manipulate their earnings at low
levels of short term debt maturity due to lower liquidity risk. The higher short-
term debt maturity levels, however, are the greater incentive for managers to
manipulate earnings. This means that the opportunistic activity of managers
increases with rising short-term debt maturity levels. Finally, managers are
encouraged to manipulate revenue, overproduce inventory to lower the cost of
products sold and reduce discretionary spending to reach short-run earnings
goals in the presence of high levels of short-term debt maturity. These findings
complement to the understanding of the impact of debt, including both total
debt in general and short term debt maturity in particular, on earnings
management.
There are two highlighted implications from this study. The first is that
accounting numbers will faithfully reflect the underlying potential economic

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output for businesses with low short-term debt maturity, because managers
might not be so worried about liquidity and reduce the incentives to
manipulate earnings, supporting the short-term debt maturity monitoring
hypothesis. The second is that managers prefer to manage earnings by the
modification of real operations, validating the debt covenant theory, with
extreme levels of short-term debt maturity. Therefore, for firms with high
levels of short-term debt, investors/lenders should be careful in using financial
statements as the sole source of information to analyze firm’s actual financial
performance.
We assume that comparing the effect of short term debt maturity on both real
and accrual-based earnings management will be more useful. This will help to
provide a thorough evaluation of the trade-off or supplementary relationship
between the two forms of management of earnings at various stages of the short-
term maturity of the debt.

Acknowledgment
This research is funded by University of Economics and Law,
Vietnam National University Ho Chi Minh City, Vietnam.

Summary
Is short term debt maturity linked to real earning management?
This paper explores the association between the maturity of short-
term debt and real earnings management in the context of an
emerging market. We use a panel dataset of listed firms in Vietnam
over the period from 2009 to 2017 and employ conventional
methods for panel data analysis. Our work contributes by
documenting a non-linear relationship between short-term debt
maturity and manipulation of earnings. In particular, businesses
prefer to refrain from manipulating earnings at low short-term
debt maturity levels but are likely to manage them at higher
short-term debt maturity levels. Under a battery of robustness
evaluations, this result remains unchanged. This means that
investors/lenders of firms should be vigilant with the information
recorded on financial statements because managers can manage
corporate earnings, especially at high short-term debt levels.

Keywords: Real earnings management; short term debt maturity; information

asymmetry.

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Appendix

Control variables

Costofdebt Measured by the ratio of interest expense to average total debt, this reflects the
expense of debt financing.

Effectivetax Determined by the ratio of the accumulated income taxes to the accumulated
pre-tax income, this reflects effective tax rate.

Zscore Reflects the financial health of the company, calculated by the Z-score of Altman.

Postprofit It is a dummy variable, equivalent to 1 if the company reports a profit in the fis-
cal year and 0 if the company reports a profit in the fiscal year..

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Is short term debt maturity
linked to real earning management?
 Management
2022
Vol. 26, No. 1

Marketshare This is the opposite of the costs associated with the manipulation of real opera-
tions, measured by the ratio of a company’s revenue to the industry’s overall
sales.

ROA Measured by the ratio of operating income to total assets, this reflects the output
of the companies.

TA Represents the size of the businesses, determined by the total assets’ logarithmic.

MTB Measured by the ratio of the market value of equity to the book value of equity,
or market-to-book, it reflects growth opportunities.

203
NGUYEN THANH LIEM
TRINH QUOC TRUNG
NGUYEN VINH KHUONG
CAO THI MIEN THUY